Policy Brief No. 04 of 2001 on Beer Excise Tax in Kenya: An Assessment

Abstract

In Kenya, the excise tax on beer contributes a significant share to government revenue. The government is therefore interested in establishing the optimal excise tax rates for the different types of beer: lagers and stouts. The optimal tax rate means that the government maximizes revenue from beer taxation. This paper estimates the revenue-maximizing tax rate in the beer sub sector in Kenya. I he study uses two methodological approaches to derive theprice elasticities necessary for computing the revenue-maximizing tax rate. 1 he first approach is the partial adjustment model While this model has beenfound to provide fairly satifactory estimates of Demand elasticities, do not take into account consumer persistence. The second approach takes this factor into account and hypothesises that consumers have a strong memory in their consumption adjustment process. The study underpins the importance of a time horizon in evaluating revenue-maximizing tax rates and confirms the argument that short-run Price elasticities are not appropriate for making policy choices.